Rate cut by RBI unlikely despite lower wholesale inflation

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At 5.2%, wholesale inflation in April, released on Thursday, surprised analysts. This is lower than the consensus estimate of 5.7%, which was also the March figure.

Earlier this week, retail inflation, or inflation based on the Consumer Price Index (CPI), too surprised the market. It accelerated 8.59% in April from a year earlier, more than the consensus estimate of 8.5% and the 8.3% pace in March.

The rise was driven by food inflation (mainly vegetables and fruits)—9.8% against 9.1% in March—and essential household items (7.3% against 6.5% in March). The so-called core retail inflation, or non-food and non-oil inflation, dropped marginally to 7.7% from 7.8%.

Interestingly, the decline in wholesale inflation was also driven by food (8.64% in April, down from 9.9% in March) and energy (8.9% against 11.2%). The core wholesale inflation, or non-food, non-oil, manufactured goods inflation, however, eased slightly—by 10 basis points, from 3.5% to 3.4%.

One basis point is one-hundredth of a percentage point.

The puzzle is how could food items drive up retail inflation and drive down wholesale inflation in the same month? The reason could be differences in cost at different stages of the supply chain.

In the coming months, food inflation may go up as the new government will take time to address the supply-side issues and, on top of that, there are apprehensions about a weak monsoon as the shadow of El Nino looms large on the horizon. Besides, administered fuel price too will add to the pressure.

So, one does not need to take the drop in wholesale inflation seriously as long as retail inflation remains elevated and core inflation does not show any sign of significant easing. The Reserve Bank of India will be left with no choice but to maintain the interest rate when it reviews its monetary policy in June at the current level despite the contraction of factory output for two months in succession.

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